Report outlines options to address unemployment trust
Photo | Grant Welker
Long-vacant storefronts at 554 Main St. in downtown Worcester.
A new report from a Tufts University think tank suggests that now "may not be an optimal moment" to raise unemployment tax rates, but says that a repeated pattern of rate freezes is a "recipe for long-term insolvency and future debt."
The report, authored by Center for Policy Analysis executive director Evan Horowitz, lays out a series of options the state could pursue on unemployment insurance while many small businesses continue to grapple with the impacts of the COVID-19 pandemic.
"In the near term, the state needs to address its $2.2 billion debt to the federal government," the report concludes. "But without a broader package of changes, it is not clear Massachusetts' unemployment insurance system can maintain solvency and ensure adequate benefits."
The COVID-19 pandemic and widespread business closures sent unemployment skyrocketing in Massachusetts and many other states, resulting in a flood of new unemployment claims and more benefit payments flowing out of the state's unemployment trust fund. As of December, the state unemployment rate stood at 7.4 percent.
Massachusetts has borrowed more than $2.2 billion from the federal government to keep the unemployment insurance trust fund afloat. The new report said that because the UI system is funded by business taxes, the burden of that debt will ultimately fall "not on the state but on local businesses and workers."
Amid the massive increase in demand for joblessness aid, higher rates for business' contributions to the trust fund are taking effect this year. Gov. Charlie Baker filed a bill -- first in December, then again on Jan. 13 after state lawmakers did not pass it before the Jan. 5 end of the legislative session -- that aims to keep the trust fund solvent and provide relief to businesses by freezing the UI rate at its previous schedule and reducing the nearly 60 percent hike that's currently looming to an average of about 17 percent.
Baker's bill (H 55), which is before the House Ways and Means Committee, would also enable the state to issue bonds to pay back the federal loans and create a surcharge on employers to help repay interest on those loans.
The Tufts report contemplates Baker's proposal to stretch the debt repayment over time through longer-term bonds as one approach the state could take to address the challenges facing its unemployment system, noting that the bonds would raise "fairness concerns, as it means that some of today's debt will ultimately be repaid by businesses that don't exist yet - while businesses that close or move in upcoming years could avoid contributing."
Other options include using some federal COVID-19 relief money to pay off the debt, which Horowitz wrote would "violate the lockbox principle that unemployment insurance benefits should be paid via business taxes — and never with general revenue."
"Alternatively, the state could choose not to address the debt at all, as other states have done in similar circumstances," he wrote. "In that case, the federal government would solve the problem by automatically raising federal unemployment insurance taxes on Massachusetts businesses until all arrears are repaid."
The report flags longer-term challenges as well, saying the state "was particularly ill-prepared for the skyrocketing jobless rates of 2020 because our UI program was already underfunded."
One reason for this underfunding, according to the report, is that Massachusetts "hasn't followed its own standards for when to raise and lower taxes," and lawmakers have frozen or constrained rates rather than adhering to statutes that are "calibrated to create a healthy reserve by triggering automatic tax increases when savings are small and reducing rates when savings are adequate."
The current triggers call for tax increases when the UI trust fund is low, which the report said often happens during or just after a recession when businesses are facing budgetary strain.
"It might make more sense if tax increases were triggered by some combination of low savings and economic health," the report said. "As an example, rates could be automatically frozen when joblessness is high (e.g., if the unemployment rate is over 7 percent for 9 of the last 12 months.) Once the job market recovers, rates could rise to rebuild reserves."
Employers pay UI taxes on the first $15,000 their employees earn, and the report said that long-term deficits "are virtually inevitable in the Massachusetts UI system" because benefits automatically keep up with wage growth but tax payments do not.
It put forward policy options adopted by some other states, including indexing the taxable wage base to wage growth, raising it from $15,000, making both of those changes together, or introducing a tax on employees like those for Social Security and Medicare.
"One potential benefit could be a shift in political dynamics," Horowitz wrote. "In the current setup, workers tend to defend the benefit side of the program while employers fight to limit tax increases. That means the only way for both sides to win is chronic underfunding (benefits stay strong, funding stays low)."
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